Guide to Student Loans

Student Loans 101

To cover the cost of tuition and other
educational expenses, most students consider taking out a student loan.
Whether you're a first-time undergraduate, a graduate student, or a
working professional seeking an online degree, there are a number of
loan options available to you. This guide explains the basics
of student loans from the federal government as well as private financial
institutions.

Student Loans: Federal or Private

Student loans are available from two
sources: federal loans from U.S. government-backed loan programs,
and private loans from banks or other financial institutions. Federal loans are usually administered through your school's financial aid office. Many schools also offer private loans, or you can work directly with a lender to secure your own loan.
In general, federal loans offer lower interest rates and easier repayment
options, although private loans may offer higher borrowing limits.

Additionally, many schools offer financial aid programs and special payment terms for students of all ages and income levels.

For first-time college students, the first step in evaluating federal student
loans is usually to complete the Free Application for Student Aid (FAFSA).
After completing the FAFSA, you'll learn which federal loans and grants
are available to you. The new FAFSA4caster program provides students with an early estimate
of the amount of aid they're likely to qualify for, but keep in mind
that submitting a completed FAFSA is the only way to be certain about
the amount of aid available to you.

The FAFSA is a free form available
through your school's financial aid office or online at http://www.FAFSA.ed.gov. Be wary of web sites that promise to
complete the FAFSA for you in exchange for a fee - there's no need to
pay anything to file a FAFSA, and it's not likely that you'll save any
effort by using a fee-based FAFSA service.

Because of their lower interest rates,
federal student loans are almost always the best option. However,
private loans are a useful way for many students to fund their education.
Some students obtain private loans because they are ineligible for federal
loans. And many federal student loan recipients require private
loans to cover the full cost of tuition. Several banks and financial
services companies have developed private loan programs designed for
students of law, medicine, and other expensive degrees.

Federal Loan Programs

The U.S. Department of Education offers
three distinct student loan programs: Stafford, Perkins, and PLUS.
Perkins and Stafford loans are disbursed based upon financial need,
while PLUS loans are awarded based on creditworthiness.

Regardless of the federal loan program,
all federal student loans share a few common qualities:

Regardless of the federal loan program,
all federal student loans share a few common qualities:

All federal loans must be repaid, even if the borrower drops out or changes schools.
Some students incorrectly assume that repayment of federal student loans
is contingent upon graduation. This is false. Just like
defaulting on a loan from a bank or credit card company, failure to
pay a federal student loan can result in damaged credit. Additionally,
the government can even withhold tax refunds or take other action to
recover defaulted loans.

No payments are due while the borrower is enrolled in school

Three repayment options are available for all federal loans:

Standard repayment - fixed monthly payments for up to ten years

Graduated repayment - a ten-year
payment plan with smaller monthly payments at first, and larger monthly
payments toward the end of the repayment period

Extended repayment - fixed
or graduated payments for up to 25 years

Repayment of federal student loans,
except PLUS loans, can be postponed due to deferment (typically granted
if the borrower enrolls in school again) or forbearance (typically granted
due to an inability to pay). However, interest will accrue during
forbearance and (for some loans) during deferment.

The total amount borrowed in federal
loans cannot exceed the total cost of education minus other forms of
financial aid - in other words, you can't borrow more than you really
need. (But, remember that expenses like transportation and student
housing can be included in the total cost of education.)

Stafford Loans

Once known as Guaranteed Student Loans,
Stafford loans are awarded based on financial need and do not require
a credit check. Stafford loans have a variable interest rate,
capped at 8.25%. Current interest rates are 6% for subsidized
Stafford loans and 6.8% for unsubsidized Stafford loans.
For loan recipients who are in active military service, the interest
rate is capped at 6%. Repayment of Stafford loans begins six months
after graduation.

Subsidized Stafford loans are awarded
based upon financial need. On subsidized Stafford loans, no interest
is charged until repayment begins, and no interest is charged while
the loan is in deferment. Because of the tremendous savings on
interest, subsidized Stafford loans are a great deal, and any student
who qualifies for a subsidized Stafford loan should strongly consider
accepting it before taking an unsubsidized loan of any kind.

On unsubsidized Stafford loans, borrowers
are charged interest as soon as the loan is disbursed. Unsubsidized
Stafford loans have higher borrowing limits than subsidized Stafford
loans. It's not uncommon for students to qualify for and accept
both subsidized and unsubsidized Stafford loans in order to cover their
expenses. The borrowing limit for Stafford loans - subsidized
or unsubsidized -ranges from $3,500 to $20,500 per academic year.
Borrowing limits are based upon the student's year in school, graduate/undergraduate
status, and whether the student is considered a dependent on anyone's
tax returns. Borrowing limits for undergraduates are typically
between $3,500 and $5,500 per academic year.

Although all Stafford loans are made
available by the U.S. Department of Education, some Stafford loans are
actually funded by a bank or other private lender. Stafford Federal Family Education Loans
(FFELs) are made by a bank and backed by the U.S. government, while
Stafford Federal Direct Student Loans are funded directly by the government
and administered through the school. The type of Stafford loan
is determined by the school's participation in the William
D. Ford Federal Direct Student Loan program -- participating schools
(approximately 1,300 nationwide) offer Federal Direct loans, and students
at non-participating schools will receive FFELs.

Federal Direct and FFEL Stafford loans
offer the same interest rates and payment terms. FFEL borrowers
have the ability to choose which bank funds their loan, and may be able
to obtain slightly lower interest rates through bank programs like automatic
payment or reduced interest rates for consistent on-time payment.

The Stafford Loan Forgiveness Program
for Teachers offers significant loan forgiveness to teachers who meet
the program requirements, including training in certain specialties
and/or spending five years working in low-income schools.

Stafford loans provide low income borrowers
with an income-contingent repayment option. Under this plan, monthly
payments are calculated annually based on borrower's income; any unpaid
loan amount after twenty-five years is cancelled.

Perkins Loans

Formerly known as National Defense
Student Loans or National Direct Student Loans, Perkins loans are awarded
based solely upon financial need. Perkins loans charge a flat
5% interest rate. All Perkins loans are subsidized, which means
no interest is charged until nine months after graduation when repayment
begins. All Perkins loans are administered through schools, and are
funded by money from the U.S. Department of Education as well as loan
payments from former students. Each school has a limited (and
varying) amount of money available for Perkins loans, so interested
students are encouraged to complete their FAFSA as early as possible.
Undergraduates may receive up to $4,000 annually in Perkins loans, and
graduate students may receive up to $6,000 annually. Actual loan
amounts vary based on financial need, other financial aid sources, and
total funds available at the school.

Perkins loan borrowers may be eligible
for complete loan forgiveness - meaning no repayment is required - if
they meet program requirements and are employed in certain vocations
such as law enforcement, teaching, Peace Corps, or social work.
Perkins loan forgiveness is usually administered through the school
and requires proper and thorough documentation of the student's employment.
For more information, consult your financial aid counselor.

Like Stafford loans, Perkins loans
offer an income-contingent repayment for low income borrowers.
Monthly payments are calculated annually based on borrower's income,
and any loan amount remaining after 25 years is forgiven.

PLUS Loans

PLUS (Parent Loans for Undergraduate
Students) loans are available to parents of dependent students.
Unlike other federal student loans, PLUS loans are made based on creditworthiness,
not financial need. Additionally, it is technically unnecessary
to complete a FAFSA to obtain a PLUS loan - but completing the FAFSA
is highly recommended, since it can uncover alternative and less expensive
sources of financial aid.

Like Stafford loans, PLUS loans are
available either through the school (if the school participates in the
William D. Ford Federal Direct Student Loan program), or through a private
lender as a Federal Family Education Loan (FFEL). FFEL and Federal
Direct PLUS loans offer the same interest rates and payment terms.
As with Stafford FFELs, borrowers are advised to consult their financial
aid counselors when choosing a PLUS FFEL lender.

PLUS loans have a variable interest
rate capped at 9%. Repayment begins 60 days after the school receives
the funds. Most PLUS loans are repaid on a ten-year term, although
it's possible to finance a PLUS loan for up to 30 years. Borrowers
can elect to make interest-only payments while the student is in school.

PLUS loans for graduate students -
also called GradPLUS loans - are also available, and are similar to
PLUS loans, except that loans are made to students instead of parents.

Private Loans

Private student loans, sometimes called
personal student loans or alternative student loans, are made by a bank
or other financial institution. Generally, private loans will
have higher interest rates and less favorable terms than federal loans.
Some private loans may not even defer payments while the borrower is
in school. Still, private student loans usually have better interest
rates and payment terms than other lines of credit like credit cards or home equity credit, and therefore private
loans are a viable option for many students. Private loans will
require a co-signer unless the borrower has a solid and well-established
credit history.

Almost every financial institution
offers a credit product that could be considered a student loan.
Many banks and other lenders have developed special student loans to
cover the high cost of education for graduate, medical, and law students.
Check with your financial aid counselor for recommendations, as most
financial aid offices maintain a list of preferred lenders.

Sallie Mae

SLM Corporation, formerly the
Student Loan Marketing Association and commonly known as Sallie Mae,
funds many Stafford and PLUS FFELs and also provides private loans such
as the Sallie Mae Smart Option Student Loan and the Signature Student
Loan.

Originally a government-sponsored entity,
Sallie Mae completely separated from the federal government in 2004.
Today, SLM Corporation is a Fortune 500 company that operates several
financial subsidiaries. Its subsidiaries include Nellie Mae, which specializes
in funding FFELs.